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Drop in Top-Executive Pay Is Tied to Company Performance

The move by public companies in the U.S. to make a larger portion of top-executive compensation variable—based on individual performance, company performance and company stock appreciation—has had a dramatic impact on how and what executives are being paid, according to ERI Economic Research Institute, a provider of compensation information.

ERI’s Executive Compensation Index, based on proxy filings by a benchmark list of publicly traded U.S. companies, shows several notable trends regarding top-executive compensation. Among these:

• Total overall compensation for the highest paid executive was down more than 10 percent from May 2009 to May 2010.

• This decrease was primarily the result of a nearly 26 percent drop in cash bonuses and incentives.

• Company revenues were lower than a year earlier for the first time in the 13 years that ERI has calculated its Executive Compensation Index.

Executive compensation typically consists of several components—a fixed base salary; a variable bonus in cash or non-equity incentives based on meeting performance goals; and a variable equity payment in stock (either restricted stock awards or stock options) based on stock prices. Pension and other compensation components are added to the compensation package for these top executives (see Table 1).

Table 1.
Highest-Paid Executive Compensation by Compensation Type

May 2009

May 2010

Percent Change

Salary

$1,206,572

$1,202,634

-0.3%

Bonus and non-equity incentives

$4,017,300

$2,994,132

-25.5%

-- Restricted stock awards (RSAs)

$4,798,263

$4,223,938

-12.0%

-- Stock options

$4,046,043

$4,257,018

5.2%

Total RSA/stock options

$8,844,306

$8,480,956

-4.1%

Pension

$1,618,505

$1,595,525

-1.4%

All other compensation

$965,259

$602,094

-37.6%

Total overall compensation

$16,651,942

$14,875,341

-10.7%

Company revenues (millions)

$63,213

$56,957

-9.9%

Source: ERI Economic Research Institute.

The numbers show that salary levels have remained flat, while the drop in cash compensation has been entirely attributable to decreased bonuses and non-equity incentives (see figure 1).

Figure 1. Key Compensation Components and Company Revenue Over Time

While there has been a nearly 38 percent decrease in discretionary "all other" compensation, this category is relatively small. With bonus and non-equity compensation making up such a large proportion of total compensation for the highest-paid executive (see figure 2), the 26 percent drop in that category is the driving factor behind the overall drop in total compensation.

Figure 2. Trends in the Compensation Components, 2007—2010

The trend to make pay more variable, with a large percentage of compensation based on performance and company revenues, is expected to continue, according to ERI's analysis. However, as company revenue decreased during the 2008-09 recession, the performance goals of the top executive were reset at a lower level. "Expectations have been dropped and, in the future, there may be increases particularly in the bonus and non-equity incentives category," predicted Christopher Chasteen, ERI’s director of research.